The coal seam gas controversy is moving closer to cities, with exploration apparently starting in a built-up area about half an hour's drive from the outskirts of Melbourne.

Residents at Yarragon say they are worried about a drilling rig that moved into an industrial estate near the centre of town on Monday.

The rig, which the ABC filmed drilling today, is situated very close to a number of warehouses and a couple of hundred metres away from the town's main shopping strip.

The owners of one of the warehouses, Frank and Marianne Templeton, said they were shocked when drilling started.

They said the drilling workers told them they were testing for gas.

"I just felt sick," Mrs Templeton said.

Friends of the Earth campaigner Ursula Alquier says the environmental organisation has been following the activities of the Greenpower Natural Gas company for some time and that this drilling is consistent with the company's other coal seam gas (CSG) testing around Victoria.

But Greenpower director John Watts, who was at the Yarragon site today but who declined to be interviewed on camera, said the drilling had "no commercial purpose."

He said it was only being conducted so as to maintain the company's mining tenement on the land.

CSG extraction is banned in Victoria because of a government moratorium.

The State Government has repeatedly said it is in the process of investigating the industry.